Greek debt crisis ignites a gold rush

Governments around the world are throwing money at the looming European financial crisis. Not only is this not a debt solution but may have international implications.

ByRocky Vega, Guest bloggerMay 13, 2010

Gold coins and bars at the Wilmington Trust Depository. With gold at record highs, new signs of trouble remain on deck.

Andy Nelson/The Christian Science Monitor/File

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Despite the debt crises facing several EU countries, governments around the world are still throwing money at the problem. In an attempt to eradicate the failure of already having spent too much, the governments are spending more. This kind of decision making undermines trust in fiat currency, ironic because by definition fiat currency is only useful when people trust it.

Further, euro weakness in the wake of the Greek sovereign debt crisis has turned attention away from what’s been a relatively soft greenback. With gold at new record highs, today at $1,245.40 an ounce, new signs of trouble remain on deck.

“‘While Monday’s announcement of an EU fund calmed immediate fears about risks of contagion of the Greek crisis, markets remain doubtful about the capacity of governments to cut their deficits swiftly,’ Tremblay said in e-mailed comments.

“Spain’s government on Wednesday announced a series of measures to lower its deficit, which reached more than 11% of gross domestic product in 2009. […] Gold is traditionally seen as a relatively safe asset that keeps its value, and investors tend to buy the metal at times of economic and financial turbulence. ‘The sheer scale of fiscal deficits facing numerous countries is likely to prompt further diversification from fiat currencies and should ultimately propel gold to fresh highs,’ James Moore, an analyst at TheBullionDesk.com, wrote in a note.”

Yet, this is hardly only a euro problem. The euro’s having the biggest crisis of its young life, but other major currencies are also struggling. The British pound, once the glory of the empire, is troubled by England’s hung parliament. The renminbi, the currency of up and coming China, is still not freely traded. And, of course, the greenback has an already impressive deficit. Fiat money has become the foundation our global economy is built upon but — if we lose our faith in these pieces of paper — they may all go to their intrinsic value of zero.